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| an entity set up to provide a product or service to a price adequate to allow the business to continue to operate. |
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Definition
| This is the most common form of business organization and is defined as a business owned and operated by one individual. Although a sole proprietorship may have many employees, it has only one owner, with that owner ultimately responsible for all decisions as well as all debts the business may incur. |
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Definition
A partnership is a business owned jointly by two or more individuals. Partnerships can have just a few partners or hundreds as in large law firms.
Partnerships can come in many forms but the two primary types are General Partnerships and Limited Partnerships.
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Definition
| In a General Partnership each partner has a say in the operation of the business but is also responsible for their proportion of any debt the business may incur. |
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| In a Limited Partnership (sometimes called a Limited Liability Partnership) there is usually a general partner(s) and limited partners. A general partner is responsible for the day-to-day operations of the business and is also responsible for any debt the business incurs. A limited partner has no financial obligation beyond their initial investment but they also have no say over the day-to-day operations of the business. If they start getting involved with day-to-day decisions they may be considered a general partner. |
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| A corporation is a legal entity (distinct from a person) that often has similar legal rights to a person. A corporation can own property, incur debts, and sue and be sued. Corporations provide for limited liability, easy transfer of ownership, and continuity of existence. |
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| Corporations are considered to be separate from its owners. One of the most common forms of a corporation is the public corporation, which is owned by thousands of individual owners (shareholders/stockholders). Although the corporation can end up owing considerable debt and may even be sued, the owner’s liability is limited to their investment. |
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| In many cases, corporations are taxed on any profits they make. This is the case with most public corporations. After the taxes have been paid, the remaining profit can either be paid out to the owners (called a dividend) or the profit can be reinvested back into the company to drive further growth. This is called retained earnings. Many companies do a percentage of both. |
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| An individual is free to sell their share of a corporation to another individual or entity at a mutually agreeable price. Certificates of ownership are usually referred to as stock from the Middle English word for a block of wood (Stok) which is what ownership interests were originally engraved on. Most sellers and buyers of stock employ agents called stockbrokers to facilitate the transactions and match up buyers and sellers. Stock can be owned by individuals or by entities such as pension plans, insurance companies, mutual funds (where individuals have pooled their money together to jointly purchase investments) etc |
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| Since the owners of a corporation can sell their shares to someone else or will them to relatives, corporations are considered to have an indefinite life. The first modern corporation was the Dutch East India Company which was established as a colonial trading company in 1602 and lasted until its dissolution in 1800. Some corporations in existence today have been around for more than 200 years such as The Bank of New York (founded in 1784) and the DuPont Corporation (founded in 1802). |
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| These are corporations whose shares are held by the general public. The world’s largest corporations such as Wal-Mart and IBM are generally of this type. |
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| These are corporations whose shares are usually held by a limited number of individuals with a private resale market. |
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| Profit and Not-For-Profit Corporations |
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Definition
| Most corporations are set up as for profit although some corporations such as hospitals and medical centers are occasionally set up as not-for-profit. Any excess earnings are generally reinvested. |
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Definition
| These are corporations that are administered as an agency of the government or that operate with the full or implied backing of the government. The Federal Deposit Insurance Corporation (FDIC) is an example of a government corporation. |
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| Subchapter S and Limited Liability Corporation (LLC) |
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Definition
| These are generally small corporations allowed to have the limited liability aspects of larger corporations but are taxed as a partnership. In other words, the corporation does not pay income tax but is able to pass profits on to its owners who then pay normal personal income taxes. |
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Definition
| Financial Accounting is the process that culminates in the preparation of financial reports on the enterprise as a whole for use by both internal and external parties. Users of these financial reports include investors, creditors, managers, unions, and government agencies. |
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| Managerial Accounting is the process of identifying, measuring, analyzing, and communicating financial information needed by management to plan, evaluate, and control an organization’s operation. |
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Definition
| This is the area of accounting that deals with how to allocate costs. Examples would be how to allocate an electric bill among different departments, how to allocate advertising among different divisions of a company etc. |
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Definition
| This is the area of accounting that deals with the preparation of tax returns. It also includes tax planning. |
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| Finance is the art and science of managing money. Accounting is the art and science of measuring money. |
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Definition
| Accrual is the accounting basis that brings items to account as they are earned or incurred (and not as cash is received or paid) and includes them in financial statements in the related accounting period. |
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Definition
| Responsible for financing, cash management, and relationships with banks and other financial institutions. |
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Definition
| Responsible for budgeting, preparation of financial statements, accounting, and taxes |
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| Chief Financial Officer (CFO) |
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Definition
| Oversees the Treasurer and Controller and sets overall financial strategy |
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Definition
| Describes an entity’s financial activities for a period of time, usually one quarter or one year. |
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Definition
| Used to describe an entity’s financial resources and obligations at one point in time. |
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Term
| Balance Sheet (Statement of Financial Position) |
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Definition
| Shows where a company stands in financial terms at a specific date. This measures a company’s net worth. |
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Definition
| Shows a company’s profit related financial activity for a period of time. |
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Definition
| Shows the movement of cash in and out of a company for a period of time. |
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Term
| Statement of Stockholders’ Equity |
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Definition
| Keeps track of the changes in a company’s net worth. |
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Term
| Generally Accepted Accounting Principles (GAAP) |
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Definition
A set of accepted standards for external accounting information which are used to determine what information is included in financial statements and how this information is prepared and presented.
The Securities and Exchange Commission has the final say in regards to financial reporting standards and guidelines.
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Term
| Financial Accounting Standards Board (FASB) |
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Definition
An independent rule-making body, consisting of seven members from the accounting profession, industry, government, and accounting education. Lending support to these members are an advisory council and a large research staff.
The FASB is authorized by the SEC to issue Statements of Financial Accounting Standards, which represent official expressions of Generally Accepted Accounting Principles.
The SEC has the legal power to establish accounting principles and financial reporting requirements for publicly owned corporations.
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Term
| Public Company Accounting Oversight Board (PCAOB) |
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Definition
| Created to oversee the audits of public companies that are subject to the securities laws of the United States. |
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Definition
Buildings or Copyrights. Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Assets can be of physical substance (tangible) or intangible.
Assets that are expected to be sold, consumed, or converted to cash within a year are called current or short-term assets. Assets that are expected to be used for more than a year are called non-current or long-term assets.
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Term
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Definition
| Financial Obligations or Debt. This is what a business owes. Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. |
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Term
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Definition
| Equity is the net worth of a business. It is simply what the business owns (assets) less what it owes (liabilities). |
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Definition
Liquidity is defined as how quickly an item can be converted to cash at fair value. Liquidity is also defined as the ability of a business to pay its current debts as they come due. Specifically, the ability of a business to pay its current liabilities (due within one year) is called liquidity while the ability to pay long-term debt (due more than one year out) is called solvency.
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Term
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Definition
| Accounts receivables are the amounts of money that a company is owed by its customers. |
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Term
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Definition
| The amount that a company owes to it suppliers is called Accounts Payable. |
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Definition
Depreciation is an income tax deduction that allows a taxpayer to recover the cost of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property.
Most types of tangible property (except, land), such as buildings, machinery, vehicles, furniture, and equipment are depreciable. Likewise, certain intangible property, such as patents, copyrights, and computer software is depreciable (called amortization).
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Term
| Economic Entity assumption |
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Definition
| Accounts are kept separate for the business entity, not the persons who are associated with that entity. In other words, a business is considered to be separate from the owner, even in a sole proprietorship. |
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Definition
| Accounting reports only facts that can be expressed in monetary amounts. These are not the only things that should be used to evaluate a company. A change in top executives, lawsuits etc are important matters. |
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Definition
| Economic activities of an enterprise can be divided into artificial time periods. |
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Definition
| Accounting assumes that an entity will continue to operate indefinitely and that it is not about to be sold or liquidated. |
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Term
| . Historical Cost principle |
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Definition
| Requires that most assets and liabilities be accounted for and reported on the basis of acquisition price. |
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Term
| Revenue Recognition principle |
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Definition
| Revenue is generally recognized when earned. |
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Term
| Revenue Recognition principle |
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Definition
| Revenue is generally recognized when earned. |
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Term
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Definition
| That expenses (efforts) are matched with revenues (accomplishments) of the period. |
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Term
| Full Disclosure principle |
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Definition
| The principle that users of financial information are informed of any facts necessary for the proper interpretation of the statements. |
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Term
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Definition
| When in doubt choose the solution that will be least likely to overstate assets and income. |
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Term
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Definition
| Relates to an item’s impact on a firm’s overall financial operations. |
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Term
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Definition
| : Cost of providing information must be weighed against the benefits derived from using the information. |
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Term
| Industry Practices constraint |
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Definition
| The peculiar nature of some industries and business concerns sometimes requires departure from basic theory. |
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Term
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Definition
| The balance sheet is used to measure where a company stands financially at a specific point in time. It shows where a company is at and is sometimes called, ‘The Statement of Financial Position’. |
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Term
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Definition
| Tangible means that it has physical substance. In other words, it can be touched. Assets in this category would be things like buildings, desks, company owned vehicles etc. |
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Term
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Definition
| Intangible means that it has no physical substance but its value is usually represented by a piece of paper. Assets in this category would be things like trademarks, copyrights, logos, etc. |
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Term
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Definition
Equity is the net worth of a company and is usually referred to as Stockholders’ Equity.
Stockholders’ Equity is calculated by simply subtracting liabilities from assets.
Total Assets – Total Liabilities = Stockholders’ Equity
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Term
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Definition
| Sometimes referred to as the Statement of Earnings or Statement of Income. The Income Statement is the report that measures the success of enterprise operations for a given period of time. |
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Term
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Definition
| In flows of assets from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations e.g. Sales, Royalties, Licensing Fees, etc. |
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Term
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Definition
Sometimes known as Cost of Revenues or Cost of Sales, this is the expense that a company incurred to manufacture, create, or sell a product. It includes the purchase price of raw material as well as the expenses of turning it into a product.
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Term
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Definition
| Gross Profit is Revenue less the allocated expense of distributing or producing a product or service. In other words, Revenues – Cost of Goods Sold. Gross Profit tells you how much profit a business would have made if it didn’t have to pay administrative salaries, income taxes etc. |
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Definition
| These are the expenses incurred during the normal operation of a business such as general salaries, utilities, Research and Development (R&D) costs etc.. |
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Term
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Definition
| Also known as Operating Profit, this is a measure of the profit that a company generates from its own operations. It does not include interest income or interest expenses and is calculated before income taxes. |
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Term
| Earnings Before Interest and Taxes (EBIT) |
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Definition
| Many times companies will deduct depreciation and other miscellaneous expenses from operating income come up with this number. Again, it’s important to read the notes accompanying the financial statements. |
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Term
| The Statement of Cash Flows |
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Definition
| The Statement of Cash Flows measures how much actual cash is moving in and out of a company. |
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Term
| Cash Flow From Operations |
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Definition
| This is a firm's net cash inflow or outflow resulting directly from its regular operations. It is the cash that comes in and goes out from day to day operating activities. |
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Term
| Cash Flow From Investments |
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Definition
| Net cash flow showing how much cash the company has received (or paid) from its investing activities. It includes cash that the company has received by investing its excess cash in different investments (stocks, bonds, etc), cash the company has received (or paid) from buying or selling subsidiaries, and all the cash the company has paid for its physical property, such as plants and equipment. |
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Term
| Cash Flow From Financing Activities |
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Definition
| Net cash flow that results from external activities such as paying cash dividends, adding or paying off loans, or issuing and selling more stock. A company may at times show a large negative number in this area simply from paying back loans. |
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Term
| The Statement of Stockholders’ Equity |
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Definition
| This is a financial statement that shows the changes in the equity of a company. These changes can be due to net income (or net loss), and/or owners’ investment (or return i.e. dividends). |
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Definition
| Direct Materials, Direct Labor, Factory Overhead |
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Term
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Definition
| All expenses that are not COGS |
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Term
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Definition
| Current Assets - Current Liabilities |
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